KNOWLEDGE HUB: 14 Ways to Fund Your Business
Many people dream of starting their own business, but it can be difficult to find the money to do so. Even later on, most businesses say that raising finance is the hardest part of running a business. So the process of finding and securing funding needs to be high on your agenda when you get started. A critical factor is picking the financial option that is right for you and your new businesses. The best way to know what you need is to know what is available and what each one offers. Here’s a partial list (as there are new ways of financing appearing all the time) to get you started.
1.Writing your Business Plan
Before you contact your first potential investor, there’s something you need. A plan. Specifically a business plan for your new company (or for the expansion of your existing business). Every investor will want to know about your idea and a business plan is the best way to get them this information. You’ll also need financial information on yourself (and your existing business if you are expanding). Things like your income, credit score, and debts are all of interest when securing financing. Come prepared and you will make a good impression.
2. Digging into Personal Savings
The most common funding source for small business startups is the founder’s own pocket. People dip into their own savings and use the money to get started. A guideline to remember is to never invest more of your own money than you can afford to lose. Not every idea, not even every good idea, actually turns into a successful business so plan carefully. Additionally, not everyone has sufficient personal savings to afford to start a business. While this is one of the safest ways of financing, it doesn’t work for everyone.
3. Exploring Home Equity Loans
On the subject of using your own money to start your business, you can put up some of your own assets to raise cash. A home equity loan borrows money based on how much of your house is paid off. If you’ve had your home for quite a while, this can be enough to start a business, but you have to realize this is putting your home at risk if your business fails and you can’t pay off your loan.
4. Family and Friends
Another very personal way of finding money is to ask those closest to you, your family and friends, to give or loan you money to fund your business. While the process is much less regulated than a bank loan, it has its own hazards. Treat these loans as you would any other loan, provide assurances of when and how the money will be paid back and write down your agreement. While a new business may be your dream, consider if it is worth causing personal strife with those people you most value. Make sure everything is understood and agreed to before they loan you anything.
5. Taking out Personal Business Loans
Taking out a loan for your business based on your personal credit is an option for any new entrepreneur. Typically. these are unsecured personal loans rather than ones associated with your business. They can be quite easy to get but can carry a higher interest rate than more traditional business loans.
There are a number of ways to use your retirement savings to fund a business. Some are specific to investing in a business, such as the Rollover for Business Startups (ROBS) program, while others could be used for any purpose. A ROBS is not a loan against your retirement account, it is a type of transfer to a 401(k) for the new business which can then be used for investments. You can take a loan against your 401(k) account and set your own interest and payment schedules (within the rules governing that) or take a withdrawal (with appropriate penalties). All of these put your retirement funding at risk to start your business though, so consult a financial expert on the impact this will have.
7. Business Bank Loan
A traditional bank loan for a new business can be one of the most affordable, low interest options, but it is very difficult to qualify and banks require a large amount of documentation on both your business and personal finances.
8. SBA Loan
The Small Business Administration guarantees loans to small businesses, but they also have a high bar for qualification and require much paperwork. They also can take a few weeks to process. While their interest rates aren’t quite as good as a bank, they are close and are one of the more common options for getting a loan.
9. Personal Credit Card
This is using a personal credit card to pay for your businesses startup costs. This should be considered a last resort, as interest rates are high, and this impacts your personal credit.
10. Business Credit Card
Specifically designed credit card accounts for businesses, even for startups, can be a much better option. Some offer interest free periods to start with and there is at least some separation between your business and personal finances. But any credit card will have a high interest rate compared to more traditional routes like bank loans.
11. Business Line of Credit
This closely resembles a business credit card in that you only pay interest on the amount you have used, rather than the entire amount you borrowed.
A relatively recent option is using websites to bring in funding from many very small investors, usually by offering a reward for their investment once a new product is ready. This has been used by authors to finance books and by board game manufacturers to make new games, along with many others. Early investors for books might get the book when it if released, plus some bonus, a t-shirt, a signed copy, or some other perk.
Some businesses can qualify for direct funding based on some quality about them. For instance, veterans can apply for grants to start businesses.
14. Venture Capital/Angel Investor
Companies and individuals will invest in new businesses with what they believe is a good chance of bringing them a high return.
As you can see there are many different options and matching your needs up to the characteristics of each one and choosing the best is a very individual task. Keep in mind your personal finances will be closely involved, and plan accordingly. The right financing is out there for your new business, you just need to find it!